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so in this paper investor flows and fragility in corporate Bor funds uh which I wrote with David Ang and ha
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young uh we study flows and performance of mutual funds that invest in corporate
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bonds let me give you just a brief summary uh assets of mutual funds that invest in corporate bonds have grown
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substantially in recent years following the crisis many investors felt that they
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did not have many attractive uh investment vehicles and a lot of money has basically flown into uh mutual funds
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that invest in corporate bonds now this poses I think a very interesting challenge for researchers for many years
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there has been a lot of research studying uh mutual funds that invest in equity uh but there hasn't been that
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much research uh looking into bonds uh into mutual funds that invest in uh in bonds and in particular in corporate
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bonds now there's a growing concern of fragility uh the possibility that a lot
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of this money is going to be withdrawn at the same time from many mutual funds as a result causing effects on uh
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corporate bonds of the prices of corporate bonds and uh potentially destabilizing uh the market for
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corporate bonds and having also some real effects for the economy as a whole as a result there is an uh I think
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growing importance to understand the patterns of flows and performance of mutual funds that invest in corporate
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bonds and this is what we do in this uh study previous research on Equity mutual
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funds basically showed that uh outflows are not very sensitive to bad performance what we show in the context
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of corporate bond mutual funds is that outflows are much more sensitive to bad performance in fact outflows are more
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sensitive to bad performance than inflows are to good performance which is the complete opposite of what people
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tend to find in the context of equity mutual funds in the context of fragility this raises the concern that in case of
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uh bad performance or overall bad times uh there will be massive outflows out of
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the corporate bond mutual funds now clearly given that this is an industry that holds about 1.7 uh trillion dollars
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in in in assets uh this is uh a reason for concern or a reason uh to sort of watch out and see uh what's going to
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happen in case of uh bad developments I think going into this research we didn't really know what to
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expect as I mentioned there was a lot of research on Equity mutual funds basically showing that inflows are much
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more sensitive to good performance than outflows are to bad performance we did not know what to expect going into the
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research on corporate bond mutual funds and we found the opposite that outflows are much more sensitive to bad
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performance than inflows are to good performance I'm not sure if I would call
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it a surprise but it it was uh a very interesting finding I think we think that the sensitivity of
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outflow to bad performance in corporate bond mutual funds is coming due to the fact that they hold illiquid assets but
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at the same time they allow people and institutions to take money out on a daily BAS cases based on the last
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updated price uh what we show in the research is that this sensitivity depends greatly indeed on the
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illiquidity of the asset so for example funds that hold more cash are less subject to this great sensitivity of
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outflows to bad performance and this is because if you have uh more cash uh then
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investors know that they depend Less on uh the withdrawals by others and as a result they're less Keen to take their
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money out once there are bad developments um in the same vein we basically show that the sensitivity goes
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up uh when IL liquidity is greater at the macro level and this can be measured by the vix for example which is a
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measure of overall volatility and other measures of aggregate illiquidity uh so basically what we show
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is that funds uh that invest in more illiquid assets or during more illiquid times are going to be more subject to
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Greater sensitivity of out flows to bad performance uh this is something that we
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can think of as more fragility so you can basically address this fragility by holding more liquidity or changing the
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way that investors take money out uh whatever the Redemption formula is whatever they get out of the fund in
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case they take their money out so I think that there is an overall perception uh that mutual funds are not
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subject to any kind of fragility uh basically people view mutual funds as being very different
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from Banks investors put the money in the fund and get whatever is the value of the assets when they take their money
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out I think our paper shed some more light on it basically showing that there is some potential for fragility there is
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some of this first mover advantage that we tend to see in the context of Banks and this is because when people take
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their money out of the fund they impose some negative externalities on those who
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stay in the fund this is Amplified by illiquidity and as a result you tend to see this first mover Advantage uh
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amplifying uh the uh incentive of people to take their money out in case of bad performance so this is basically the
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first paper that looks at the sensitivity of outflow to Performance in corporate bond funds as I said corporate
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bond funds have become a very uh important uh investment vehicle in the economy in recent years it's important
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to understand what causes withdrawals out of these mutual funds and as far as I know we are the first paper to to look
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at that and analyze it um we basically document that there is some sense of fragility in the sense that uh people
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when they think that others are going to take their money out of mutual funds that invest in corporate uh bonds they
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have greater incentive to do that uh as well in in this particular paper we basically look at fragility at the level
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of the fund uh we show that there is a first mover Advantage at the level of the fund in the sense that if investors
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think that other investors are going to take their money out of the mutual fund they have a greater incentive to do so
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as well uh this is kind of similar to the phenomenon that is well known as a bank run uh people take money out of a
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bank just because they expect other people will do that we think something kind of similar maybe weaker happens uh
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in the context of uh mutual funds uh in particular those that invest in corporate bonds because uh corporate
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bonds tend to be very liquid so this force is going to be stronger I think going uh further uh one wants to look
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more at systemic implications the extent to which uh this uh puts the economy as
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a whole or the Market as a whole in a tough position in a risky uh position and this will be particularly important
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for policy implications so far as I mentioned we only look at it at the level of the fund and we think there is
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this Force the first mover Advantage at the level of the fund itself uh but policy intervention will only be
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required in case uh this also uh poses externalities on the rest of the economy uh externalities that uh fund managers
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themselves are not going to internalize and are not going to address [Music]